The Metaphysical Market

By Greg Moses

In my crash course on market theory (let the pun stand) no discovery has been more interesting than the Elliott Wave.

As the story goes, Charles Nelson Elliott was too sick to do much more than to study stock charts. In the charts he discovered a coherent form that is today called the Elliott Wave.

The guru of contemporary Elliott Wave theory, Robert Prechter, describes the basic form of the Elliott wave in terms of two connected zig-zag patterns. First there is the five section zig-zag of which the first, third, and fifth sections move in the direction of the main trend while the second and fourth sections correct the trend. Next comes a three section zig-zag that corrects the overall trend of the five sections that came before it.

Furthermore, the wave structure is fractal in nature, which means that zooming in or out of a chart pattern will yield different levels of form in which each level remains faithful to the basic pattern.

In The Elliott Wave Theory co-authored by Prechter and A.J. Frost in 1978, the large pattern was described as bullish. Another book by Prechter in 2002, titled “Conquer the Crash” discusses a general downward reversal of the Elliott Wave pattern.

Of course it is difficult to match up the spirit of Capitalism with a market price theory that is fractal. Whatever can the wave be expressing if not the rational push and pull of supply and demand.

As a first reply to the skeptic, we may note that the theory of price as a reflection of a rational market has apparently waned out of favor even among mainstream theorists who are not proponents of the Elliott Wave.

As Prechter explains the background theory, the Elliott Wave traces the disclosure of collective moods of optimism or pessimism. Down markets don’t depress us; it is our depression that takes the market down. With up markets it’s just the reverse. We get into states of euphoria.

Contrast the recent experience of the credit bubble with the mood we seem to be in today. Invincibility was the collective mood then. Today, vulnerability closes in.

The coherence of the Elliott Wave theory appears to be impressive. It reminds me of two things. First there were the Pythagoreans who taught that everything is number. They probably got it from the pyramid builders. What is there about a pyramid that is not a testament to the truth of pure numbers as form?

The second thing that the Elliott Wave reminds me of is the theory of synchronicity advanced by Carl Jung. Although Prechter discusses the Elliott Wave phenomenon as one-way causal where mood causes market fluctuation, Jung’s theory of synchronicity is more agnostic about the relationship between matter and psyche. What Jung could say is that matter and psyche move together.

Actually, there is a third thing that the Elliott Wave calls to mind. In the Ethics of Spinoza, freedom appears to be identical to understanding. One is free of a determination as soon as one understands it.

Disclosure: positions in cash.

The Categorical Portfolio: Global Ex-Military Equities

By Greg Moses

According to Kantian ethical principles what counts is good will. This means that one acts in accordance with principles that can be willed as universal principles (the categorical imperative). For Kant, there is no moral content in actions that are based upon some estimation of return (hypothetical imperatives). So I just want to make it clear that what I am about to say has nothing to do with investment advice for anyone seeking return.

But if one might be interested in putting money into circulation in equities markets where it can be put to work by employers. And if one wants to select employers who will not be turning out military weapons, then here’s something to consider.

There are two ETFs which would yield participation in a broad global portfolio excluding the manufacture of military weapons. The iShares KLD 400 Social Index ETF that trades under the ticker symbol DSI offers broad coverage of US equities roughly equivalent to the S&P 500 but excludes military weapons manufacturers. The KLD Domini 400 Social Index which underlies DSI is a path breaker in the history of socially responsible investing.

In addition, the JETS Dow Jones Islamic Market International Index Fund that trades under the ticker JVS offers broad coverage of international (ex-US) equities with an active screen against military weapons manufacturers. JVS is also a pathbreaking investment tool, since it is the first “Sharia-Compliant” ETF in the USA, based upon one of the many Dow Jones Islamic Market indexes (the International Titans 100).

If combined as a “good will” investment strategy, DSI and JVS would offer global participation in large cap equities that do not (by and large in their core businesses) produce military weapons.

Disclosure: the author owns a few shares of DSI and JVS.

JVS: International Islamic Investing

By Greg Moses

As the introductory article at Seeking Alpha warns, Islamic investing is not always about selecting companies that purport to be be Islamic or that do business in predominantly Islamic markets.

In the case of a new Exchange Traded Fund (ETF) offered by Javelin Exchange Traded Shares (JETS) and known as the JETS Dow Jones Islamic Market International Index Fund (JVS), the top company held is BP (4.94 percent) and the top country represented is the UK (18.11 percent).

According to a press release at the JVS fund began trading on the New York Stock Exchange (NYSE) June 30, 2009. While Islamic ETFs have traded in other countries, this is the first Islamic ETF to trade in the USA.

As the name of the fund suggests, it is based upon one of the Dow Jones Islamic indexes–the DJ Islamic Market International Titans 100 IndexSM.

As explained by the DJIM Family Brochure, the first of the DJ Islamic Market indexes was constructed in 1999 as “the first attempt by any global index provider to create a measurement tool for Shari’ah compliant investors and to reduce the research costs of ascertaining and measuring Shari’ah compliance by creating a global universe of Shari’ah screen companies approved by a Shari’ah Supervisory board.”

As of the date of this post, the Dow Jones Islamic Market International Titans 100 IndexSM is not readily accessible at the djindexes website. A similar Titans 100 Index is constructed from a combination of the DJIM U.S. Titans 50 IndexSM, the DJIM Europe Titans 25 IndexSM, and the DJIM Asia/Pacific Titans 25 IndexSM. It’s not clear at this time what sorts of regional weightings are used by djindexes to construct the ex-US International Titans 100 Index.

In order to produce the universe of equities eligible for the DJIM International Titans 100 Index, Dow Jones pulls from the “eligible universe” of companies in the DJIM World Index. The DJIM World Index in turn is compiled from 55 country-level indexes.

Now in order for companies to be listed on DJIM country indexes in the first place, they must pass through several screens.

According to the Guide to the Dow Jones Islamic Market IndexesSM
(June 2009) there are certain business activities that are “inconsistent with Shari`ah precepts”: Alcohol, Tobacco, Pork-related products, Conventional financial services (banking, insurance, etc.), Weapons and defense, and Entertainment (hotels, casinos/gambling, cinema, pornography, music, etc.).

If the company has business activities in any one of the following sectors defined by the Industry Classification Benchmark (ICB), it is considered inappropriate for Islamic investment purposes and is excluded from the index.

• 2717 Defense
• 3533 Brewers
• 3535 Distillers & Vintners
• 3577 Food Products
• 3745 Recreational Products
• 3785 Tobacco
• 5337 Food Retailers & Wholesalers
• 5553 Broadcasting & Entertainment
• 5555 Media Agencies
• 5752 Gambling
• 5753 Hotels
• 5755 Recreational Services
• 5757 Restaurants & Bars
• 8355 Banks
• 8532 Full Line Insurance
• 8534 Insurance Brokers
• 8536 Property & Casualty Insurance
• 8538 Reinsurance
• 8575 Life Insurance
• 8600 Real Estate Development & Holding
• 8773 Consumer Finance
• 8775 Specialty Finance
• 8777 Investment Services
• 8779 Mortgage Finance

Companies which pass this test will then be subjected to a further screen for Acceptable Financial Ratios:

All of the following must be less than 33%:
• Total debt divided by trailing 12-month average market capitalization
• The sum of a company’s cash and interest-bearing securities divided by trailing 12-month average market capitalization
• Accounts receivables divided by trailing 12-month average market capitalization

Companies that pass all the above screens “are included as components of the Dow Jones Islamic Market World Index.” And the index is reviewed on a quarterly basis.

Note: the above article was revised on July 8 thanks to an email from the JETS office clarifying the difference between the DJIM Titans 100 Index (added 9/7/2006) which is documented at djindexes–and the newer DJIM International Titans Index (added 3/4/2009) which is not yet documented at djindexes. The Bloomberg ticker symbol for the International index is DJI100XT:IND.  

TIAA-CREF Social Choices

By Greg Moses

“TIAA-CREF serves 3.6 million active and retired employees participating in more than 27,000 retirement plans and has $363 billion in combined assets under management (as of 12/31/08),” says the official website at

There are two “social choice” products offered by TIAA-CREF. First is the CREF Social Choice Variable Annuity founded on March 1, 1990 and reporting net invested assets of $7.29 billion as of June 30, 2009.

Next is the TIAA-CREF Social Choice Equity Fund (TRSCX), founded on Oct. 1, 2002 with reported net invested assets of $587.17 million as of June 30, 2009.

In this post I will be focusing on the Equity Fund (not the Variable Annuity). According to a 2009 Prospectus posted at the TIAA CREF website:

The [Social Choice Equities] Fund [TRSCX] primarily invests in companies that are screened by KLD Research and Analytics, Inc. (“KLD”) to favor companies that meet or exceed certain environmental, social and governance (“ESG”) criteria. The Fund does this by investing in companies included in the KLD Broad Market Social IndexSM (the “KLD BMS Index”) . . .

At the KLD website ( we find a press release dated July 8, 2008 describing how the KLD BMS Index is constructed.

The KLD BMS Index is comprised of 1,875 companies drawn from the “eligible universe” of the 3,000 largest US equities (the press release does not mention the Russell 3000 by name).

Three KLD social indexes are combined to make up the Broad Market Social Index. The “eligible universe” is divided into large cap, mid-cap, and small cap ranges. Of the 400 large cap stocks eligible for selection, 247 “social stocks” are chosen. Of the 600 mid-cap stocks, 384 are chosen. And of the 2,000 small cap stocks, 1,244 are selected for social investing. The percentage of stocks selected from each market cap index ranges from about 62 percent to 64 percent.

To select the stocks, KLD assigns ESG scores to each company for Environmental, Social, and Governance practices. Then the stocks are arranged in sectors. From each sector, the top 60 percent of stocks are selected based on ESG scores (the press release says KLD targets the top 65 percent).

In the screening process, adverse weight is given to participation in “certain business activities, such as the manufacture of alcohol, tobacco products or weapons.” Instead of applying a zero-tolerance policy with respect to these business practices, the KLD Broad Market system screens out a certain “threshold” of activity.

“KLD has expanded its ESG analytical framework so that its rating system reflects the social and environmental impact of the production and sale of alcohol, tobacco products, military and civilian weapons, nuclear power and gambling products and services,” says the press release.

Due to the introduction of new indexes and a lowering of the market capitalization targets, the total number of companies in the BMSI series of indexes has decreased. However, due to the modification of exclusionary screens, KLD has a larger pool of companies to select from in sectors such as industrials (previously subject to military weapons exclusions), utilities (nuclear power), consumer staples (alcohol) and consumer discretionary (gambling). This expansion of the pool of eligible companies has led to an increase in the average ESG performance of companies in the BMSI series.

“Companies with strong ESG performance are no longer automatically excluded for minor involvement in a screened activity,” said Thomas Kuh. “As more investors consider ESG factors, the KLD Broad Market Social Index series enables investment managers to provide their clients with greater market cap segmentation and holdings with higher ESG performance.”

After the KLD Broad Market Social Index is constructed, it is deconstructed into two “composite indexes.” First, the “social selections” from the mid-cap stocks are combined with the “social selections” from the large cap stocks to produce a composite large-mid index of 631 social stocks (LMSI: 63.1 percent of 1,000 stocks).

Next, the social stocks from the mid caps are combined with the social stocks from the small caps to make a composite small-mid index of 1,628 stocks (SMSI: 62.6 percent of 2,600 stocks).

In the end, here were the top ten large-cap stocks designated as KLD social in July 2008: Microsoft Corp., Procter & Gamble Co., Johnson & Johnson, IBM, Cisco Systems, Google Inc., Intel, Bank of America, Hewlett-Packard Co., and Pepsico.

Here were the top ten mid-cap stocks: Petrohawk Energy Corp., NYMEX Holdings, Inc., Helmerich & Payne, Inc., Steel Dynamics, Inc., SandRidge Energy, Inc., BMC Software, Inc., The Estee Lauder Co’s Inc., Mattel, Inc., Cabot Oil & Gas Corp., and Embarq Corp.

And here were the top ten small-caps: Dril-Quip, Inc., Delta Petroleum Corp., ADC Telecommunications, Inc., Nicor, Inc., Swift Energy Company, Complete Production Services, Inc., Potlatch Corp., EMCOR Group, Inc., American Superconductor Corp., and Goodrich Petroleum Corp.

Disclosure: the author owns shares of both social choice products from TIAA-CREF.